2013 (6) TMI 43 - HC - Income Tax

Loss on revaluation of security - Nature of securities - permanent investment - claim for writing off bad debts - deduction u/s 80M - dividend income - net dividend income or gross dividend - Mercantile system of accounting - Applicability of the provisions of RBI Act and the directions issued by the RBI in the matter of computation of tax liability and taxable income - Entertainment expenditure - HELD THAT - While 30% of the amount claimed as loss is allowed by the assessing authority itself and this amount is not in issue before us and therefore we have not opined anything on the same. The issue raised is on the rejection of the claim for deductions as a business loss in respect of balance 70% and on the above examination we find that the amount insofar as 70% of the investment is concerned even as per the assessee it is held as permanent investment and may be because it is required to be held so by the assessee- Bank in terms of the instructions and guidelines issued by the RBI and to fulfil the statutory requirement under the RBI Act read with Banking Regulation Act. In fact we are of the view that the Assessing Officer has not merely recorded the finding of fact on this aspect but also very correctly as in our considered opinion no assessee can claim an investment of lasting nature to be part of its trading asset or as an asset held by way of stock-in-trade. While it is possible to convert any long term asset as part of a trading asset and the Income-tax Act also recognizes the same it also deals with the consequences of such declaration and it is because of this reasons Mr. Seshachala had drawn our attention to the definition of Capital asset under Section 2 (14) and transfer under Section 2(47) of the Act. Be that as it may we are of the view that on the Assessees own declaration that it was permanent investment the Tribunal could not have held otherwise as lasting asset and definitely cannot assume the character of Stock-in-trade. In the instant case we are of the view that on the findings recorded by the Assessing Officer and as confirmed by the appellate commissioner the Tribunal could not and should not have upset such a finding by drawing a comparison to a situation prevailing in respect of some other bank and the view of the Tribunal in that case was based on the board circular which had held the field at the relevant point of time. Even otherwise we find in the facts and circumstances this is a clear case of investment in the securities which cannot be characterized as stock-in-trade at all as even as per the admission of the assessee and as per the relaxation assuming it has any relevance given by RBI it can only be 30% of the investment which can be clothed with the character of stock-in-trade as the assessee-bank had some freedom in exchanging such securities or any other form of security it can be said that to this extent securities are available for sale but the condition is that it again should be invested in any other security so that requirement of investment in securities as per RBI guidelines/instructions is maintained by the bank. It is for this reason we also reject the request of Sri Parthasarathy that the matter warrants remand to the Tribunal for reexamination on this aspect of the matter. Accordingly questions 1 and 2 are answered in the negative and in favour of the revenue. Bad debts - Following the Supreme Court in the case of Catholic Syrian Bank Ltd v. CIT 2012 (2) TMI 262 - SUPREME COURT . Accordingly we answer the question in the negative set aside the finding of the Tribunal on this aspect but nevertheless remand the matter to the Assessing Officer to re-examine this question afresh in the wake of the law as declared by the Supreme Court in the case of Catholic Syrian Bank Ltd ( supra ) by applying the law as expounded by the Supreme Court to the facts of the assessee s case. Entertainment expenditure - Deduction claimed by the assessee by way of expenditure incurred on its employees - Any expenditure incurred by the employer which comes within the scope of this definition and not being an expenditure incurred towards its employees vis- -vis any obligations or terms of employment the expenditure inevitably partakes the character of entertainment expenditure and therefore the limitation stipulated in terms of Section 37(2) operates in allowing such an expenditure as deduction while computing the profits of the assessee. Therefore this question is answered in the negative and against the assessee. Dividend income in terms of Section 80M - In view of the fact that Section 80AA of the Act. This question is answered in favour of the assessee and against the revenue for the reason that the revenue had not made out any case for deduction by demonstrating the actual expenditure incurred by the assessee for earning a dividend income and therefore just because Section 80AA of the Act provides for such deduction deduction as applied by the Assessing Officer by resorting to best judgment which was not justified and the Tribunal was right in setting aside this part of the order of the assessing authority and in directing entire deduction claimed by the assessee to be allowed under Section 80M of the Act is justified in law. In the result this appeal is allowed in part questions are answered as indicated above and the Assessing Officer to give effect to the finding herein while recomputing the liability of the assessee for the assessment year in question.

Summary

The judgment from the Karnataka High Court addresses several legal questions arising from an appeal by the Revenue against the order of the Income Tax Appellate Tribunal regarding the assessment of a public limited banking company for the assessment year 1993-94. The core issues revolve around the treatment of securities as stock-in-trade, bad debts, entertainment expenditure, and deductions under Section 80M of the Income-tax Act, 1961.

Issues Presented and Considered:

(1) Whether the Tribunal was correct in allowing the deduction for loss on revaluation of securities.

(2) Whether the Tribunal was correct in holding that the securities held by the assessee were not capital assets.

(3) Whether the Tribunal was correct in its treatment of the bad debts claim.

(4) Whether the Tribunal was correct in its treatment of entertainment expenditure.

(5) Whether the Tribunal was correct in its application of Section 80M regarding dividend income deductions.

Issue-Wise Detailed Analysis:

1. Revaluation of Securities:

The legal framework involves the classification of securities as either stock-in-trade or capital assets. The Tribunal had relied on its earlier decision in a similar case to allow the deduction claimed by the assessee for the loss due to the revaluation of securities. The Court examined the relevant Board Circulars and RBI guidelines, which indicated that the classification of securities as stock-in-trade or capital assets is a factual determination. The Court found that the Tribunal erred in applying its earlier decision without considering the specific facts of the case, particularly the assessee's own classification of 70% of the securities as permanent investments. The Court concluded that these securities could not be treated as stock-in-trade and reversed the Tribunal's decision.

2. Bad Debts Claim:

The relevant legal provisions are Sections 36(1)(vii) and 36(1)(vii-a) of the Income-tax Act. The Tribunal had allowed the full claim of bad debts by the assessee, contrary to the Assessing Officer's partial disallowance. The Court noted the recent Supreme Court decision in Catholic Syrian Bank Ltd v. CIT, which clarified the application of these sections. The Court remanded the matter to the Assessing Officer for re-examination in light of this decision.

3. Entertainment Expenditure:

The issue concerned whether the expenditure incurred on employees accompanying guests should be fully deductible or subject to the limitations of Section 37(2). The Court interpreted the statutory provisions and concluded that such expenditure falls within the definition of entertainment expenditure and is subject to the limitations of Section 37(2). The Tribunal's decision to allow the full deduction was reversed.

4. Section 80M Deduction:

The question was whether the deduction under Section 80M should be on the net or gross dividend income. The Tribunal had allowed the deduction on the gross dividend income, contrary to the Assessing Officer's decision. The Court found that the Revenue had not demonstrated any specific expenditure incurred by the assessee to earn the dividend income. Therefore, the Tribunal's decision to allow the deduction on the gross dividend income was upheld.

Significant Holdings:

The Court concluded that the Tribunal erred in treating the 70% of securities as stock-in-trade, as they were classified as permanent investments by the assessee. This decision was reversed in favor of the Revenue.

The Court remanded the issue of bad debts to the Assessing Officer for reconsideration in light of the Supreme Court's decision in Catholic Syrian Bank Ltd.

The Court held that entertainment expenditure incurred on employees accompanying guests is subject to the limitations of Section 37(2) and reversed the Tribunal's decision on this issue.

The Court upheld the Tribunal's decision to allow the deduction under Section 80M on the gross dividend income, as the Revenue failed to demonstrate any specific related expenditure.

In conclusion, the appeal was allowed in part, with specific directions for the Assessing Officer to recompute the tax liability of the assessee in accordance with the Court's findings.